3 May, 2023

Is the cost of living leap caused by excessive government spending?

It is conventional economics to say it is.  If a government prints a lot of new money to finance a big increase in their spending, it must devalue each individual dollar.  There will be more dollars chasing the same amount of goods and services so prices must go up to ration out the available goods and services.  It's pretty simple logic.

But Leftists don't like that logic.  They like to think that governments can spend as much as they like as long it is in a good cause.  They just ignore the economics of the matter.

But a prominent Leftist economist has come to their rescue.  Joseph Stiglitz is a Nobel prize winner and one of the many Jews who support Leftist causes.  

I am referring to an academic article under the  title "The Causes of and Responses to Today’s Inflation". It is here:

https://rooseveltinstitute.org/wp-content/uploads/2022/12/RI_CausesofandResponsestoTodaysInflation_Report_202212.pdf

In it,  economists Joseph E. Stiglitz and Ira Regmi argue that excessive  government spending is NOT the cause of our current inflation.  It is dated December 2022 so there should have been some critique of it by now but I can find none.  So I thought I might note what I think is a basic problem with it.

For a start, nobody disputes that cost-push factors have had a significant role.  Government lockdowns greatly disrupted supply chains and thus drove up shortage-driven prices. And the sanctions  in response to Vladimir Putin's war were a further huge supply chain limitation.

But was that all that there was to it?  Stiglitz & Co. say it was and they justify that by saying that consumption during the the recent inflationary period has not been high.  They say: "Real personal consumption, even after recovering from the depths of the pandemic, was only slightly above trend and not commensurate with the level of inflation seen during the same time."

He is here using absolutes rather than relativities.  The demand might have been subdued in absolute terms but that fails to take account of the already mentioned supply deficiencies and their price consequences.  That demand remained at or a bit above previous levels DESPITE the higher prices and poor availability of some goods, shows that cost push pressures were not the only influence at work.  We also have to look at people's RESPONSE to the cost push pressures.  And when we do that we see that demand was in fact high in the circumstances.  And what pressure kept that demand surprisingly high?  Demand pull, that good old profligate government spending and its usual effect of creating high demand  

Stiglitz tries to get government spending off the hook as a cause of inflation but we see that government spending did have an expansionary effect on demand if we look at demand in context.

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